Residential Mortgage Underwriting Practices and Procedures Guideline (B-20) Sound Mortgage Underwriting Contributes to Financial Stability The safety and stability of federally regulated financial institutions is fundamental to the ongoing health of Canada’s financial system and its economy. OSFI contributes to this stability by fulfilling its mandate to protect the interests of depositors and other creditors of financial institutions. It does this by setting standards that improve banks’ resilience, both under normal conditions and in the event of a financial downturn. Lenders subject to OSFI supervision hold nearly 80 per cent of all residential mortgages issued in Canada, and residential mortgage loans account for almost 30 per cent of the total assets held by these lenders. Sound mortgage underwriting practices reduce risks to the financial system, and to Canadians who entrust their savings to Canada’s financial institutions. Sound mortgage underwriting practices require lenders to assess a borrower’s ability to pay their loan under a variety of conditions. A lender should consider potential changes to a borrower’s income and expenses, as well as changes to the market environment including the valuation of the property that is being mortgaged. History of the B-20 Guideline In 2012, OSFI introduced its Residential Mortgage Underwriting Practices and Procedures Guideline (Guideline B-20) to set out expectations for strong residential mortgage underwriting for federally regulated lenders. The original guideline was mostly principles-based and included an expectation that lenders would stress test borrowers for adverse conditions. In 2016, OSFI reminded lenders of its underwriting expectations in the form of a public letter. When OSFI continued to see examples of relaxed mortgage underwriting at some lenders, it issued an update to B-20 in 2017 that came into effect in January 2018. The updated B-20 clarified and strengthened expectations to address what OSFI saw as increasing risks in an environment of historically low interest rates, high levels of consumer debt and housing imbalances. The revised Guideline B-20 includes: measures requiring financial institutions to apply greater rigor when assessing a borrower’s ability to repay their mortgage loans, including when verifying a borrower’s employment status and income history a revised minimum qualifying rate (stress test) that requires lenders to confirm borrowers would be able to continue repaying their mortgage loans if faced with a sudden change to their circumstances (income loss, increased interest rates, additional expenses, etc.). The minimum qualifying rate is the greater of the contractual mortgage rate plus two percentage points, or the five-year benchmark rate published by the Bank of Canada a requirement for lenders to place more scrutiny on property valuations, establish dynamic loan-to-value limits that reflect the risk of specific properties and markets, and update these limits and practices as housing markets and the economic environment evolve Mortgage Renewals The application of B-20 to mortgage renewals has remained consistent since the introduction of the guideline in 2012. When a mortgage renews, the existing lender typically does not re-underwrite the loan as long as the borrower is current with their payments. As the lender is also expected to periodically update its risk analysis throughout the life of the loan, OSFI sees this as a reasonable practice and does not require the re-underwriting of existing mortgages when they come up for renewal. If a borrower decides to change lenders, the new lender must act responsibly by following their own established underwriting standards. Business models and risk tolerances are different across lenders; it is not responsible for lenders to rely on the past underwriting standards of another lender.